The Fraud Act 2006 came into force on 15 January 2007. It replaces the existing deception offences with a new general offence of fraud, which can be committed in three ways:

Fraud by false representation

Dishonestly making a false representation where the person intends, by making the representation, to make a gain for themselves or for another, or to cause loss to another or expose another to a risk of loss. A representation is false if it is untrue or misleading and the person making it knows that it is, or might be, untrue or misleading.

Fraud by failing to disclose information

Failing to disclose to another person information that a person is under a legal duty to disclose and intends, by failing to disclose the information, to make a gain for themselves or another, or to cause loss to another, or to expose another to a risk of loss.

Fraud by abuse of position

Dishonestly abusing a position in which a person is expected to safeguard, or not to act against, the financial interests of another person with the intention of making a gain for themselves, or another, or to cause a loss to another, or to expose another to risk of loss.

This reform of the law of fraud follows the recommendation of the 1992 Law Commission Report that a single offence of fraud should be created in place of the then patchwork of crimes: a sole, all-encompassing offence of fraud would be better able to deal with the many ways in which fraud may be committed.

The first two offences are particularly relevant in the property arena when considering replies to enquiries, the provision of warranties and the formation of insurance contracts.

Replies to enquiries

A false representation from a seller in replying to enquiries may not only lead to a civil claim in damages from the buyer, but also result in criminal sanctions.

In the recent case of Doe v Skegg [2006], which was decided just before the Act came into force, the sellers’ neighbour’s son had been trespassing on their drive and harassing them. The sellers wrote to the neighbour threatening legal action.

When completing the seller’s property information form (SPIF), although aware that their replies formed part of the contract with the buyers, the sellers stated that no letters had been received or sent affecting the property. The purchase was completed, the buyers moved in and they then became aware of the problem. The buyer issued proceedings for damages for loss suffered as a result of the reduced value of the property.

The High Court held that the sellers failed to disclose the existence of the dispute concerning the neighbour’s son’s behaviour, although they knew they should have done, because they thought it would affect the sale of the property. The false representation on the SPIF had been made fraudulently, as they could not have reasonably believed that what they had written was true.

Had this case been decided after the Act came into force, it is likely that the sellers would have committed the offence of fraud by either dishonestly making a false representation or failing to disclose information.

Dishonestly making a false representation

With regard to the first offence, the sellers intended to make a ‘gain’ for themselves by completing the sale. The sellers were aware that if they advised of the difficulty with their neighbour’s son then the prospective buyers would probably not have gone ahead. Section 5 of the Act provides that ‘gain’ or ‘loss’ extend only to gain or loss in money or other property (‘property’ means any property, real or personal). The sellers might also have been liable on the grounds of causing loss to another, or exposing another to a risk of loss, in the knowledge that the property would be worth less than the asking price with the ongoing dispute.

Sellers should also beware that if the buyers had found out about the behaviour of the son and decided not to proceed then, although there would be no claim for damages from the buyer, the sellers could still be prosecuted for the fraud of making the false representation with the intention that the buyer would enter into the contract.

Failing to disclose information

For dishonest non-disclosure to constitute fraud, there must be a legal duty to disclose the information or, in the absence of that duty, a failure to disclose information when in a position of trust (this is the third offence and not dealt with here).

Had the sellers a legal duty to disclose the information? At paragraphs 7.28 and 7.29 of its report, the Law Commission states that a ‘legal duty’ may arise from:

• statute;

• the fact that the transaction is one of utmost good faith (eg insurance contracts);

• the express or implied terms of a contract; or

• the existence of a fiduciary relationship between the parties.

Most contracts for sale provide that the buyer is entitled to rely upon the representations given in written replies to enquiries when considering whether to enter into the contract, but this does not mean that these representations form part of the contract. Any falsity in these representations could constitute fraud under the first offence.

However, a contract term that incorporates those replies into the contract, or requires the seller to keep the buyer updated as to any changes, may give rise to the second offence if the replies are not complete or not updated.

Any change?

There have been a number of other cases in recent years where representations in replies to enquiries have come under judicial scrutiny. Would the new Act make a difference?

In Sykes & anor v Taylor-Rose & anor [2004] the buyers sought damages from the sellers of a house who knew that a horrific murder had been committed in it when they answered ‘no’ to a question in the SPIF asking them whether there was ‘any other information which you think the buyer might have a right to know’. The Court of Appeal held that the question had been honestly answered and dismissed the claim. The Court agreed with the judge below that there was no duty to disclose the information. Whilst this question no longer appears on the SPIF, it is unlikely that the Act would have made a difference, as the crimes were not made out on the facts.

In the case of Taylor v Hamer [2002] a large quantity of flagstones were removed by the seller from part of the property being sold and the area was grassed over. In replies to enquiries the seller stated that the flagstones had not been removed from the property and were not included in the sale. The Court of Appeal held that the doctrine of ‘caveat emptor’ could not apply in the face of the fraudulent concealment of the removal of the flagstones. Under the Act the seller might also be prosecuted for the false representation.

Finally, in Banks v Cox [2000] the sellers of a nursing home stated that there had been no material change in the conduct of the business, despite having received a letter from social services stating that funding of beds would be greatly reduced and that there was now a nil waiting list that previously had always been full. In this case the sellers were liable in damages for the reply, and it is likely now that they could also be prosecuted for fraud. The judge took the view that the sale had been deliberately timed to avoid the downturn in business.

Warranties

Warranties in asset or share sale agreements will usually carry with them a contractual obligation to advise of any change and may give the buyer the opportunity to rescind or refuse to complete if any warranty is discovered to be untrue, or is misleading, or has been breached before actual completion. If the intention necessary to prove the offence of fraud can be shown on the seller’s part then the seller may be prosecuted for fraud by false representation even if the buyer decides to withdraw. The authorities are likely to be more interested in contracts involving corporate parties that may be of public interest. The contractual obligations relating to the warranties may also give rise to criminal prosecution for failing to disclose if the seller fails to keep the buyer advised of changes in the probity of the warranties.

Insurance contracts

Unlike most contracts, insurance contracts are contracts of the ‘utmost good faith’ and require the consumer to advise the insurance company of all information that may be relevant to the insurer’s decision to enter into the contract of insurance. Whilst it is generally in the consumer’s mind that non-disclosure will allow the insurer to avoid the contract, equally a false representation will have the same effect.

Clients need to be advised that representations made or not made when acquiring insurance may not only result in the policy being avoided but now could result in a criminal prosecution. Non-disclosure in the formation of insurance contracts is clearly in the Law Commission’s contemplation of what would constitute the offence of failure to disclose. Where an untrue representation is made with the necessary intention of gaining an insurance contract or hoping for insurance proceeds to be paid in satisfaction of a claim, then the offence of making a false representation may also be relevant.

Solicitor and client relationship

Could solicitors and other professionals find themselves at greater risk of committing the offence of fraud? They will need to consider circumstances where they are under a legal duty to disclose information to clients if they become aware of an error in a matter that would cause loss or expose a client to loss.

Criminal liability for fraud

Clients already advised of the importance of accuracy in replying to enquiries and in contractual obligations need to be aware of the potential criminal liability for fraud if tempted to be less than truthful. A person found guilty of the offence of fraud faces imprisonment for a term of up to ten years and a fine (or both) in addition to any civil action. It is also worth noting that there is no limitation period on when the prosecution may commence. To what extent the criminal justice system will get involved in cases where a civil claim is made remains to be seen.  © Property Law Journal